The labor market and the business cycle: relationship issues?

The labor market is in the uncomfortable position of being a leading indicator going into recession and a lagging indicator coming out. When our proprietary index of labor market conditions was developed in the late 1980s, the goal was to develop an antidote to the excessive attention analysts gave to single indicators—payroll employment, unemployment rate, unemployment rate including discouraged workers, long-term unemployment rate, or whatever—and develop a disciplined, consistent approach to multi-indicator analysis.

After finding that the average lead or lag of the comprehensive employment and comprehensive unemployment measures published in the Bureau of Economic Analysis Handbook of Cyclical Indicators (ca. 1982) was about a quarter’s lead at the peak and about the same lag at the trough, the trick was to select a few indicators that had the same averages and create a composite index from them.

As it turned out, the following five indicators met that condition:
• Goods-producing employment
• Aggregate hours index
• Unemployed 15 weeks or more as a percent of the labor force
• Unemployment rate
• Employment-to-population ratio

The composite index created from these five by using the methodology outlined in the Handbook led the business cycle by 3.5 months at the peaks designated by the National Bureau of Economic Research and lagged the trough by 3.75 months—at least in the four cycles the index spanned at its inception. Since then, there seems to have been a radical change in the relationship of the labor market to the general business cycle.

There have been three business cycle peaks since 1990; the labor market has led them by an average of 13 months. There have been two troughs; the labor market has lagged them by 15 and 20 months. These figures and the tables below can’t tell us why this is so. In fact, they might not be conclusive evidence in themselves that the labor market and the business cycle are having relationship issues. But they are suggestive, and make tomorrow’s Employment Situation and those to follow it even more interesting.

NBER Peak/ Labor Market Peak/ Lead (-)/Lag (+)

December 1969/ June 1969/ -6
November 1973/ December 1973/ +1
January 1980/ July 1979/ -6
July 1981/ April 1981/ -3
July 1990/ March 1989/ -16
March 2001/ April 2000/ -11
December 2007/ December 2006/ -12

NBER Trough/ Labor Market Trough/ Lead (-)/Lag (+)

November 1970/ August 1971/ +9
March 1975/ June 1975/ +3
July 1980/ July 1980/ 0
November 1982/ February/ 1983 +3
March 1991/ June 1992/ +15
November 2001/ July 2003/ +20

December opened with a report of unchanged construction activity. The pace of activity isn’t inspiring, but the lack of movement in either directions gets coded as neutral and comes into the Good News Diffusion Index (GNDI) as a 0.5. Profits rose in the most recent quarter. I have not yet incorporated this part of the GDP report into the GNDI, but profitability is a leading indicator of the business cycle, and the increase in “profits from current production” is thus good news.

Total construction activity for October 2009 was nearly the same as the revised September 2009. Neutral. (Neutral and closely mixed reports are scored as 0.5 in the GNDI.)

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $130.0 billion in the third quarter, compared with an increase of $43.8 billion in the second quarter.